Break clauses: how to avoid the traps

A large number of my clients are commercial tenants and following the financial earthquake that shook the nation in 2008, commercial tenants are adopting a more cautious approach by taking shorter leases.

Almost every client of mine also insists on a tenant break clause, the purpose of which is to allow a commercial tenant to exit the premises earlier than the termination date in the lease.

Almost all tenant break clauses I deal with are ‘conditional’ break clauses. They require pre-conditions to be complied with before the break clause can take effect. As such, great care and good drafting is required to ensure that the break conditions are reasonable and exercisable.

There has been a significant number of court cases on break clauses since 2010 and the upshot is break clause conditions are construed very strictly; it all depends on the literal construction/drafting of (1) the pre-conditions and (2) the break notice requirements. Failure to comply with the pre-conditions and/or serve the break notice correctly will invalidate the break clause.

Pre-conditions

Commonly, a landlord will request the following pre-conditions before the break date:

Payment of all rents due under the lease

Ensuring there are no breach of the repairing covenants in the lease

Ensuring that vacant possession is provided

These conditions are onerous and almost impossible to perform in their literal form. If there is any breach of a covenant, no matter how trivial, such breach will frustrate the right to break.

Payment of all rents will include all rents/sums even those sums which have not yet been demanded by the landlord.

‘Vacant possession’ has a very strict legal meaning which goes beyond a literal interpretation of the phrase. For example, failure to remove partitioning walls and two workman remaining on the property to carry out remediation works were both deemed as not providing vacant possession.

I would recommend that these conditions are either removed or altered substantially.

Break notice

In addition to complying with the pre-conditions, it is equally just as important that the correct break notice is given. When is it given, where, how is it served and to whom is critically important.

The devil is in the detail and the detail should be contained in the lease. The lease should say what form the notice should take, who can serve it and when the notice must be served. Make sure you know who your current landlord is. Do not confuse the managing agents (who collect the rent) with your landlord. Notice will be invalid if served on the wrong entity.

Check where the notice is to be served and when is it deemed served. Do not assume the notice is to be sent to the landlord’s registered office, this needs to be checked when drafting the lease.

Summary

With break clauses playing an increasingly important role in tenancy agreements, taking specialist legal advice before any agreement is signed can be worth its weight in gold. As a tenant, it is crucial you are aware of the exact terms and conditions you will need to satisfy should you wish to successfully execute a break clause.

As a specialist in commercial leases, I can advise on both break clauses included in existing lease agreements and the provision of clauses in new contracts, giving you greater protection and peace of mind.

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